Spain demands new ‘realism’ from EU over austerity

As Spanish unemployment breaks through the 5 million barrier, the new government of Mariano Rajoy has begun to put pressure on the European Union to ease Spain’s deficit targets, which are sending the country hurtling back into recession.

Rajoy’s government is demanding greater “realism” from Brussels as it struggles to rein in a deficit that ended more than two percentage points, or €20bn, above its EU-set 6% target last year.

EU officials are unlikely to greet his message with enthusiasm after continued wrangling in Athens over a deal with private creditors and a torrid day on the bond markets that pushed Portugal closer to needing a Greek-style rescue. Brussels indicated that talks in Greece would take at least another 48 hours.

And on Friday, ratings agency Fitch downgraded five countries – Spain, Italy, Belgium, Cyprus and Slovenia – with Spain pushed down by two notches. The move came two weeks after Standard & Poor’s downgraded nine eurozone countries, including France, which lost its coveted AAA status.

Rajoy’s attempt to strike a more relaxed deal on debt echoes that of Italy’s new technocrat prime minister, Mario Monti, who has been telling German policymakers that austerity alone may not be the answer to the eurozone’s problems.

EU leaders will meet in Brussels on Monday: the agenda will include tweaking policies to promote jobs and growth. A draft of the summit statement obtained by the Guardian says: “Growth and employment will only resume if we pursue a consistent and broad-based approach, combining fiscal consolidation, sound macroeconomic policies as well as an active employment strategy. We will stay the course and emerge from this crisis stronger.”

Spain, which already boasted Europe’s worst unemployment rate, recorded a further 350,000 job losses in the last quarter of 2011.

That rate now stands at 22.8% of the population and is set to worsen as Rajoy’s conservative People’s party government pursues a €40bn (£33bn) budget adjustment, most of it in spending cuts, to meet the EU’s deficit target of 4.4% this year.

Pressure for Brussels to review Spain’s deficit came as bond investors began to abandon neighbouring Portugal, with 10-year bond yields soaring to 15%. Bonds expert Gary Jenkins of Swordfish said: “They may have crossed the Rubicon in the eyes of the market”. He believes the talks between the Greek government and its bondholders might “become a template for Portugal in how to deal with their debt, which would not be good news for investors.” S&P already rates Portugal’s bonds as “junk”, along with Greece’s.

With a record 5.3m unemployed, Spain is facing a spiral of decline. The IMF, led by a former euro-area finance minister, Christine Lagarde (pictured below), has already predicted that the economy will shrink by 1.7% this year, with a further decline in 2013.

Further evidence that public austerity programmes were damaging the wider Spanish economy came from figures on company closures. Around 35,000 companies folded in the second half of the year – a third of all those to have shut since Spain’s economy ran into trouble at the end of 2008.

While Rajoy, who met Germany’s chancellor, Angel Merkel, in Berlin on Thursday, publicly maintains his target of reducing the deficit to 4.4% from more than 8% last year, his ministers are now letting it be known that they want substantial adjustments to Brussels’s programme.

Budget minister Cristóbal Montoro was explicit about the need for the EU to adjust its predictions – and, logically, its targets. “I am sure that no one, in Europe or anywhere else, is interested in including growth estimates that are not going to be met,” he said, adding he was convinced change would come. That, he said, would help the government to be “realistic” about its options.

The socialist opposition, meanwhile, is already complaining that Rajoy has not persuaded Brussels to relax the pressure. “The rope is tightening around our neck,” said Carme Chacón, one of two candidates to succeed former prime minister José Luis Rodríguez Zapatero as party leader.

Rajoy’s government has already announced a combination of income tax rises and spending cuts that will bring a €15bn adjustment, but that is less than half of what is needed.